Want to Start a Writing-Related Company? — Guest: Kathryn Goldman

Last summer, one of the workshops I attended at the RWA National Conference was So Your Books Have Taken Off…Now What? presented by Marie Force. While it might seem silly to go to a workshop about managing publishing success before I’d even published, Marie’s tips covered every aspect of our publishing journey.

Marie Force has sold over 3 million books, so she has a team of employees helping her manage her success. However, much of her advice was focused on getting authors to think of themselves as entrepreneurs or business people, no matter what stage we’re at in the publishing process.

For example, she recommended establishing a business bank account (even before we publish our first book) and using a business-expense-only credit card. Those are both good points that will help us stay organized down the road. One no-brainer tip she shared was getting a professional email address so we’re not sending queries from HotForLoki27@cheesyemail.com. *smile*

Another interesting point she made was the various “milestones” for when we should take the business aspect of our writing more seriously. According to Marie:

Once we reach $10K a year, we should get a CPA tax professional who can help us with accounting and ensure we properly handle all expenses and deductions. Staying out of jail for messing up taxes is always a good goal.

Once we reach a sustainable $100K a year, we should look into the benefits of incorporating. In the U.S., an S-Corp is better for FICA taxes, but an LLC is potentially helpful as well. (She’s currently an S-Corp but might switch to LLC due to her employee situation.)

Despite the fact that I write by the seat of my pants, in my normal life, I’m very much a planner. So I filed Marie’s tips away in my head and knew that when it was time for me to publish, I’d keep her business advice in mind.

Because of all this thinking and preparation, when I finally clicked publish on my stories last month, I had a plan. And that plan included starting a publishing company to handle the business aspects of my writing.

Today, I’m excited to have Kathryn Goldman here to share with us the legal aspects of starting our own company. Whether we indie publish or traditionally publish, we may want to start a company at some point in our writing career. (For example, Marie Force started an ebook formatting company, but this could also be a cover design, editing, blog tour/marketing, or any other company.)

Even if we publish traditionally, we still might want establish our pen name as a business. If we self-publish, we might want to start a publishing imprint or another type of company. And if we’re successful like Marie, we may want to turn our writing itself into a company.

(Note: Some of this post might apply to international authors, but the specifics are focused on U.S. company structures and tax rules. Please consult local experts for more information on rules in other countries.)

Some of this information would have been helpful to me months ago, but luckily, I don’t think I screwed it up too much. *smile* Please welcome Kathryn Goldman!

*****

How to Start a Publishing Company
(or Any Company)

When I learned that Jami had started her own publishing company, Blue Phoenix Press, and had published her first two books, I was thrilled for her. I love it when folks, especially creative folks, get that entrepreneurial spirit and then do something about it – make it happen. It’s fun to get wrapped up in a new project, to work with focus toward launch, and to see something become real before your eyes.

Starting a new enterprise can be frightening, as well as exhilarating. Not only is the feeling of “What if I fail?” all pervasive, there is also the ever present thought of “What if I’m not doing it right?” Entrepreneurs question themselves every step of the way about whether they’re “doing it right.” Writers and artists whose expertise is in the act of creation but perhaps not in the creation of a business are particularly prone to second guessing themselves on business issues.

As an intellectual property attorney, I have been counseling clients including creative professionals in their startup businesses for many years. Jami has graciously allowed me this space on her blog to explore how creative professionals can think about business start-up issues.

Choosing the Best Type of Business Structure

Once a creative professional decides the time is right to start a business, in this example a publishing company, the first question asked (after “Am I nuts?”) is usually, “What type of business should I form?” We are going to take a look at the different options available to help answer that question.

When it comes to answering the question, “What if I’m doing it wrong?” it’s important to know that there isn’t any one right way of starting a business. In fact, there is a whole spectrum of choices. The business structure that works for you could fall anywhere along a continuum from a simple and easy to implement solution all the way up the continuum to a more sophisticated and complex solution or anywhere in between.

Deciding what is best for you begins and ends with your specific needs and goals. My aim is to provide you with guidelines to help you decide when to choose one type of entity over another as you build your publishing empire.

***Here it comes: the disclaimer – because I’m a lawyer, I have to say there are always individual considerations and this is not legal or tax advice for your specific situation. ***

The Business Entity Continuum

This list describing the various business organization choices should give you a basic understanding of business formation to help you be thoughtful about your decision.

Sole Proprietorship

The easiest option for starting a publishing company (or any company) is to operate it as a sole proprietorship. This is a common form of business organization. In many states, you can invent a business name and use it without going through any legal formalities. If I wanted to start a publishing company called SpyderByte Publishing in Maryland, for example, all I need to do is print a business card. I can buy the domain (if it is available), set up a web site and I’m in business.

I can setup my KDP account using the name of my new publishing company. When I receive a check from Amazon and want to deposit it in the bank, I need to have a bank account called “SpyderByte Publishing.”

Before I can do that, however, the bank may require me to have what is known as a DBA registration. DBA stands for “doing business as.” DBA registrations can be obtained from your state’s corporate registration or charter office. The purpose of a state DBA registration is to create a public record of the operating entity behind SpyderByte Publishing. In this case, that entity would be me.

Once you start earning income from your publishing company, the IRS requires you to report it. Income from a sole proprietorship is reported on your individual 1040 using a Schedule C. Schedule C reflects business expenses in addition to income so you would only be taxed on your net earnings. Using my example, a Schedule C would be created for SpyderByte Publishing and attached to my tax return. You can file as many Schedule Cs as you need – one for each sole proprietorship, if you operate more than one.

From a liability perspective, as a sole proprietor you are personally liable for all the contracts you enter and any of your intentional or negligent actions done in the name of your company. You have no protection from lawsuits by third parties. But that may not matter to you. If your genre is steampunk romance, your risk of being sued for invading someone’s privacy or defamation is probably pretty low.

Using Pen Names as a Sole Proprietor

You can set yourself up as a sole proprietorship for administrative ease, choose a nifty name for your publishing company and publish under a pen name. Again, your state may not require you to register for a DBA (although the bank might). In fact, you can use pen names with relative ease in any of the business entity choices discussed in this post.

Sole Proprietor with an EIN

The next step up the ladder of business entity complexity is one in which you choose to be a sole proprietor that has its own EIN. (Sorry about all the initials, but really this is just a half step.) An EIN is an employer’s identification number. It is assigned by the IRS after completing a short online application. You need an EIN when you begin to hire employees. Until that time, you can manage your sole proprietorship reporting to the IRS with your own Social Security number.

Some banks may require you to have an EIN to set up an account in the name of your sole proprietorship. To me, that’s not a good enough reason for an EIN and instead, I’d look for a different bank. It’s not unreasonable for a bank to require some kind of government documentation before they allow you to begin depositing checks that are not in your name. I prefer the state DBA registration option over an IRS employer identification number because I like to keep my relationship with the IRS as simple as possible for as long as possible.

The two arguments in favor of getting an EIN at this stage are: (1) an additional layer of protection for your social security number; and (2) clarifying your independent contractor status if you are working as a freelancer.

Single Member LLC

If you do go the route of getting an EIN, the next step in business organization complexity is to setup an LLC. An LLC is a limited liability company. It is a business entity recognized in most states (maybe all by now, I haven’t checked recently).

An LLC offers the benefit of limited personal liability and doubles down on that benefit with relative ease of set-up and operation. You can choose any name that suits you and which is available in your state’s corporate registration or charter office where you would file Articles of Organization and pay a filing fee.

Purple Vegetable Farms LLC is a perfectly acceptable name for an LLC, for example. If you write about growing purple vegetables and it turns out that one of the vegetables you recommend happens to be poisonous when it is mixed with orange pekoe tea (or whatever), then because you’ve chosen an LLC as your business entity you will have some measure of protection from lawsuits by anyone who might have gotten sick by eating purple vegetables and drinking orange pekoe tea.

A single member LLC means that you’re in business alone, you are the only member of the company. An LLC is what is known as a pass-through entity. That means that the profits and losses pass straight through to your tax return. Any income that passes through to you is taxed at your personal income tax rate, plus you pay self-employment taxes on that income up to a certain level.

Multiple Member LLC

A multiple member LLC means you are in business with other individuals or business entities, like other LLCs. If you are in business with someone else you should always have a written agreement between you as to what you expect of them and what you are obliged to do.

The written agreement for a multi-member LLC is called an Operating Agreement. An Operating Agreement sets out the deal between the members of the company – who makes the decisions, how the decisions are made, whether you can sell your stake in the company, and many other issues. Think of an Operating Agreement as a pre-nup – sign one while everybody still likes each other.

At this point on the continuum of business structure complexity you start to incur attorney’s fees. You will also incur accountants fees at tax time because a K-1 must be prepared for each member of the company to report the pass through profits or losses on her own tax return.

With a multi-member LLC, you have business partners, limited liability, pass-through income and possibly employees. Once you start paying professional fees, you know you have achieved a certain level of sophistication. How sophisticated you want to be is up to you. *smile* (I learned online smiling from Jami.)

S-Corp

An S-Corp, or an S-Corporation, is a corporation that is created first by filing Articles of Incorporation with your state. Instead of being a member of an LLC, you are a shareholder of a corporation. An S-election is then made with the IRS. Like LLCs, S-Corps are pass-through tax entities so there is no double taxation.

An S-Corp is similar to an LLC in terms of the liability protection benefits it offers you. Your personal assets will have some measure of protection from third party lawsuits.

There can be tax benefits in choosing an S-Corp structure over the LLC. With an S-Corp, you pay yourself as an employee, so you must set a reasonable salary for yourself. If the corporation generates income above that salary, you can pay yourself the difference as a shareholder distribution which is not subject to self-employment tax and is taxed at the generally lower capital gains rate.

S-Corps are more complex than LLCs. The math of the income benefit needs to be discussed with an accountant. Gaining this income benefit may be worthwhile if you have already established a payroll system. So, there are some savings to be had with an S-Corp, but they need to be weighed against filing fees, payroll costs, and the accountants and attorneys fees it will take to realize those savings.

If you are going into business with other shareholders, the document that controls the decision making in the corporation is called a Shareholders (or Stockholders) Agreement.

Moving Up and Down Along the Continuum

If you are just starting out, keep it as simple as possible. Move up the continuum as your business needs call for it.

You can start as a sole proprietorship, then if you find that you need protection from personal liability, you can transition to an LLC. If your business grows to the point where increased income calls for a more aggressive tax structure, you can transition into an S-Corp. Or you can change to multi-member LLC if you want to add another member, etc.

Transitioning into a different business structure is not as easy as choosing the most workable structure from the beginning, but with understanding and planning it can be done. Understanding the structure that you choose, how it works and how it fits with your overall goals will reassure you that “You’re doing it right.”

*****

Kathryn Goldman is a lawyer who protects creative professionals, writers, artists, and businesses from having their work and art ripped off. She regularly lectures to writers and artists on copyright, trademark and business basics. Soon, she expects to launch an online class that teaches writers how to copyright and enforce the rights in their work.

Since she’s a lawyer, she has to mention that she’s not your lawyer (so this article isn’t technically legal advice), but you’re still invited to download her freeDigital Artists Rip-Off Protection Report.

*****

Thank you, Kathryn! From cover design and workshop presenting to “author assistant” services and managing blog tours, many writers will set up companies during their career, and it’s good for us to be aware of our options so we can make the best choices for our situation.

Remember how I’ve mentioned that we should have a business plan? Thinking about our goals in advance will help us choose the best path for us. *smile*

Do you have (or do you plan to have) a writing-related business? What type of business (publishing imprint, author services, etc.) is part of your plan? Have you thought about how to set it up? Have you taken any of Marie or Kathryn’s first steps yet (bank account, credit card, EIN, DBA registration)? Do you have any questions for Kathryn?

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I bought a domain name for my (still in my dreams) publishing company, YEARS AGO (Before I even sold my first novel) and I even have a vision for it already! Alongside putting out my own books, I’d also like to bring back *O.P. (*Out of Print) titles and give them the rebirth they deserve. Many books I’ve read and reviewed (or soon will review at “Talking Animal Addicts”) were fairly ahead of their time when they originally published, and I’d like to see them get a second chance because I KNOW the readers are there, they just didn’t get the time they needed to thrive for whatever reason(s) the original publisher stopped producing it. Especially books that touch on matters of diverity (NOT just ethnic, either) and books that normalize and show the variety in the LGTBQ experience without it being the sole point of the book. An example I love to give now is the picture books “Uncle Bobby’s Wedding” by Sarah S. Brannen. I really do believe that book was just slightly ahead of it’s time (Came out in 2008), as the views on LGBTQ have changed and evolved.as the views on LGBTQ have changed and evolved. While homophobia certainly still exists, it’s nowhere what it was in the 90s when I was a kid. (I’m speaking in terms of the U.S. and Canada, and maybe parts of Europe like France, other countries, especially in Asia, things vary A LOT!) I hope that book gets reissued as… — Read More »

Hi Taurean, I love that idea of bringing back out of print books. 🙂 I wish you the best of luck with it! But as you said, it costs money to do it right. In your case, I have no idea what it would cost to pursue the rights to those books, and each one might be different. With some, the author’s rights might have reverted due to being out of print, and with others, the original publishing company might still hold the rights. You’re right that you might need a lawyer to untangle those threads and even know who to approach. That said, the basics of a normal small publishing company don’t have be a lot. In most states, I’d think setting up a DBA sole proprietorship would be a simple form, which wouldn’t require a lawyer. Between ebooks and print-on-demand, supplying product doesn’t have to cost a whole lot either. That said, as soon as you bring in other authors, the accounting expenses would go up to keep track of everyone’s sales, royalties, and payments. (The company my partners and I set up is independent enough to grow in that way, but I’m taking it slow because I’m not ready for that step yet. 🙂 ) In your OoP scenario, these books would have already been through editing, but covers and illustrations might belong to the original publisher, so that would be an additional expense. And children’s books can’t be done as easily with print on demand, although… — Read More »

Yep, I do think I can start with just my own work at some point, I know trying to navigate those rights won’t be easy, even if I had financial leverge, but we’re allowed to dream big, whatever our dang socioeconomic status, right? I just imagine a if I could manage not only to bring a book out of print, but get it to the right readers and have it sell better than the first time. I always wonder how authors feel when they get their work reissued. One of my favorite books, “The Wainscott Weasel” got reissued last year after out of print for nearly a decade, and I hope some of the readers in my community discover it, buy (or library borrow) and read it, so it never has to O.P. again. I don’t know the legal specifics, but I imagine they were hard, perhaps especially this particular case because the book’s illustrator had died a few years later, so knowing who still had rights can get tricky. They could either still have belonged to the publisher who published it originally, or it reverted back to the original creator and is in a family estate type situation (like with big authors such as Salinger or Ian Flemming), and if the author and illustrator were two seperate people, even more legwork… At least if the parties involved are still alive, you can find ways to reach them either directly or through their agent or something. I never said my… — Read More »

Exactly! Dream big! Like I said, I love this OoP idea for you, and I’ll be cheering for you to make it happen. 🙂

Good point about needing to update scientific or historical facts. You’ve obviously put a lot of thought into this dream, which is another reason I hope you’re able to make this happen. 🙂

On Facebook, Laura Wilson-Anderson’s comments about this post brought up the idea of knowing where we need help–where are weaknesses are–and that’s a good point. I’m great at some kinds of organizing and terrible at others, so we need to plan ahead for being able to afford help in those areas, like how you mentioned with tax issues.

And I love how you point out how even though you can’t afford this step now, you’re still learning everything you can so you’ll be ready for the opportunity. That’s exactly why I went to that workshop last summer, so I greatly respect that attitude. 🙂 Thanks for sharing and good luck!

With the perseverance I’m sure you have, I believe you will reach your dream. Finances are a challenge, so taking the business route of sole proprietorship (also known as “solopreneur”) is going to be your best bet to start. It is the least expensive and simplest.

Thanks for the encouragement/advice, Kathryn, I will start solo to begin with, but my long-term goal is to give O.P. a second chance because while figuring out where my own books fit in the market is trauma-inducing, for other people’s books it’s WAY easier!

Especially since I have some connections with various bloggers and children’s book communites that I can steer the books to and give the best possible chance at a comeback, both in readers and overall sales.

Especially in the case of books by authors who now have devout readerships and “brand name” status and this was a pre-breakout release, but would still be totally viable, especially if that author’s newfound fans are already demanding it, but the author can’t convince the book’s original publisher to reissue it.

But as I said, that’s something that would have to wait until I had the finances and resources to do it.

This is something I’ve been thinking long and hard about lately. After researching the market and talking with my agent I’m beginning to wonder if self pubbing my current WIP might be the best for it. I already have an LLC set up so that’s not an issue.

I had also thought about helping other authors who write similar stories but can’t find a publisher. I’ve found many publishers who are willing to accept category style LGBT or erotica but not single title.

I’ve also be researching doing a Kickstarter or similar crowdfunding to get the ball rolling. It’s expensive to self publish and I’ve been seeing more and more authors taking this route. What are your thoughts on that?

Hi Davonne, My best writing buddy started off with a Kickstarter and it worked well for her, but I know plenty of other authors who haven’t had much luck with that route. I think it greatly depends on our platform. We can’t count on anyone (strangers or friends) supporting us unless we’re delivering something they want. For most fiction projects, we’d either have to have friends who love our work and want more, or we’d have to be growing into a genre with a strong unmet need. Your situation might qualify for either of those, but it’s one of those “you might not know until you try” things. 🙂 Personally, I decided I didn’t feel comfortable with that route, but partly that’s because I’ve seen some questionable ways of going about it. I wouldn’t want to ask someone to support me while I wrote because I don’t support projects where there’s no product yet. Too many people have good ideas but can’t implement them worth diddly-squat. 😉 My beta buddy already had her story completed and through one round of editing. Her Kickstarter was for another editing round and a cover (if I remember correctly). In other words, it was already done and a go, and the KS was just about making the product better. That’s less risky for supporters, and that setup doesn’t make me give the author a side-eye. LOL! However, that’s all just my opinion, and I’m sure people have succeeded and failed with projects all over… — Read More »

Jami, what you said here, brought such clarity and relief to my current situation like you wouldn’t believe-

“My beta buddy already had her story completed and through one round of editing. Her Kickstarter was for another editing round and a cover (if I remember correctly). In other words, it was already done and a go, and the KS was just about making the product better. That’s less risky for supporters, and that setup doesn’t make me give the author a side-eye. “

This is exactly my situation with “GABRIEL” right now, so this gives me more confidence and hope in launching my crowdfunding campaign.

I’ve got a publisher who gives me the editorial help and publishing plafrom I couldn’t afford to give myself as a soloprenuer (at this point and time), and the campaign is to get funds needed to get a illustrator and a cover that draws in the reader (something we talk about at length on this blog) and makes that professional first impression.

I’m still debating if I should go with Kickstarter or use one of the other crowdfunding platforms out there (Some of which I talked about on T.A.A. last year) but knowing I have this advantage help me see I’m doing this for the right reasons, both ethically and professionally as it pertains to my book project.

This is a great breakdown. I live in Canada, and started as a Sole Proprietorship, and have now incorporated as my business structure is becoming increasingly complex.

Another thing to think about (for US folks) is if one’s business isn’t exactly a publishing company but fits into the writing field, it might be best to set it up in a state you don’t live in, one with tax friendly laws.

I would love to see another article like this, but from the perspective of an author setting up a SP or LLC in another country but doing business in the US. Many self published authors are from Canada, Australia, the UK, etc. and have to deal with the US tax system, getting an EIN or ITIN so they don’t get hit with Withholding Tax and then fight to get it back. Others may have Legal US Partnerships (as I do) and it is important to know you will get hit with withholding tax regardless of tax treaty law. This means dealing with double taxing agencies–the US & one’s own country. Filing incorrectly can result in penalty and fees (*cough* ask me how I know) and a ton of paperwork.

That would be a great article! I know Catherine Ryan Howard and others here and here have touched on the tax withholding issue in a post or two, but I’ve never seen an article about non-U.S. folk actually setting up a business here.

As for U.S. people setting up businesses in tax-friendlier states, I know corporations can do that (many are incorporated in Delaware for whatever reason), but I don’t know if other business structures can do the same. It’s an interesting question. 🙂 Thanks for sharing your insights!

[…] writing is a business, intellectual property attorney Kathryn Goldman explains the different levels and types of writing companies an author may need to create over a career, and agent Chip MacGregor answers questions from […]

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3 years ago

Jay Warner

I found a lot of good information in this post on business structures by Kathryn Goldman. I just started deriving 100% of my income from freelance this year. I want to become a formal company, probably an LLC, but with previous bad experience in a consulting business LLC I owned with a partner (and will never ever work as an owner with a partner again) I’ve been reluctant to dive back in to it. This time it’s all me and only me. It’s nice to get all the information in one place so I can make decisions and move forward. I hope to see more posts of this kind. Thanks. Jay